Caution – Falling Currencies

In 1913, the US Congress authorized the creation of the Federal Reserve. Its mandate was limited, but it grew over time to become the central planner of all things monetary. In 1933, President Roosevelt outlawed the ownership of gold. In 1944, the soon-to-be-victorious allied powers signed a treaty at Bretton Woods, agreeing to use the US dollar as if it were gold. Their central banks would hold dollars and borrow dollars, and pyramid credit in their own currencies on top of the dollar.

The US dollar was redeemable by foreign central banks, and so this was effectively a scheme for various currencies to have a fixed exchange rate between each other and to gold. It, at least, had the virtue of limiting credit expansion, as there was still this one tie to gold and hence to reality.

The problem with fixing the price of one thing relative to another is that whichever one is undervalued is hoarded and whichever is overvalued is dumped. The US government set the price of gold too low, and so foreign central banks were increasingly demanding delivery of gold.

By the time President Nixon was in office, something had to be done. In 1971, he defaulted on the gold obligations of the US government. This had the effect of severing gold from the monetary system, plunging us into the worldwide regime of irredeemable paper money. One consequence was that the exchange rates of the various paper currencies were allowed to “float” against one another.